What is it with these communists and former communists and the compulsion to tell lies? 5 year plans, growth on track, we are all happy; we were never at war with Eurasia. Yes Big Brother. In that vein we have news from China that the economy grew by 7.6% in the second quarter of 2012. Yeah right.
Now that lie (oops I meant official number) is the lowest since 1999 and that caused a few jitters. The reaction from the analyst community is, none the less, laughable. Reuters commented that the data:
“left analysts combing a raft of accompanying data to assess whether the second quarter marks the bottom – or an extension – of the downward cycle. “Overall, this is a soft landing, but we can see that the Chinese economy is undergoing serious pain,” said Xianfang Ren, an economist at IHS Global Insight in Beijing.”
Mr Ren, you are talking cobblers. 7.6% growth would not be pain. If it were then Europe (which manages 7.6% growth every decade) would have died an agonizing death years ago. 7.6% growth is great. It is just a shame that the PRC is not really delivering anything like that.
What is truly painful is that the real economy is, as you well know, growing at nothing like that rate. Twice in the past month ( HERE and HERE) I have brought readers of this blog hard evidence that most Chinese companies engaged in: steel, shipbuilding, textiles and a range of industries have seen a massive slowdown. Order books for big ticket items have dried up. Large numbers of these (often heavily geared) enterprises are making losses. That is pain. And that sort of pain does not happen in an economy growing at 7.6%. I note for instance that in May demand for oil was up by just 0.5% year on year and electricity by 5% year on year ( and both numbers were falling sharply). Indeed the June number shows electricity growth of ( wait for it) 0%! Just how is the economy growing at such a rate without an associated increase in demand for fuel and power? New found efficiencies? So I can only conclude that the 7.6% number is a big fat porky. The number is a lie. Am I clear?
As for is this the bottom? Well how about Mr Ren checks out the statement issued on 4th July by China Vanke, the country’s largest real estate developer. Its sales increased by 19% in May – well that would have been on the basis of decisions taken in April and March. In June sales were flat on the prior year. Oooh er Missus, hardly a soft landing there. As more and more Chinese companies admit to being loss making, lay off staff as order books dry up do you reckon July will see a bounce? Me neither.
My feedback is that on the ground in the PRC the folks, outside the “experts” of the analyst community are also starting to sense that these numbers are made up and that Big Brother’s sums just do not add up. And so I pose a question for Mr Ren and others. If you were a buy to (non) let investor in one of the hundreds of thousands of luxury flats in ghost towns/unoccupied luxury flats in the big Cities/unoccupied luxury office blocks in the big Cities would you right now be a) looking to bank a few gains by reducing your exposure or b) adding to your holdings? I think we all know the answer to that one. It could be that Mr Ren and his colleagues are so confident of a soft landing that they pile in to buy this floor space that will never be used personally but I cannot believe they are that dumb. In which case there can be very few buyers indeed. There will be sellers, forced, panicked and otherwise. The question is not IF the PRC property bubble bursts as part of a very hard landing indeed but WHEN. Is it this year or next?
The China property bubble is vast. When it bursts it will not only send billions of Yuan off to money heaven but will destroy the balance sheets of banks and the confidence of whole swathes of middle class and entrepreneurial Chinese – just the sort of folks who would normally take risks to cape a capitalist society forward. These folks will recover but not for a while.
So here is my call. In the second quarter I reckon that the Chinese economy grew but not at 7.6%. There was still growth in speculative areas such as property and a tail of old orders being fulfilled. And April was probably better than May which was better than June. My guess is that real (dodgy accounting adjusted) growth was closer to 4% (i.e. in line with power demand growth during the quarter). By Q4 the annual growth rate could be anything. If the property bubble has burst by then (as it may well have started to do) than the real number will be a hell of a lot closer to 0% than 7.6%.
My guess is that we will see mammoth QE designed to prevent such a slump and a relaxation of rules stopping banks making suicide loans to property investors. Quite whether banks will make those loans or investors will want them given the impending crash is another matter. We have already seen some monetary loosening. But that itself tells you a lot. If the economy was really growing at almost 8% per annum and the authorities thought that this was “the bottom” of a soft landing then there would be no need for any QE at all or talk of further QE.
China and anything geared to it remains a stonking sell.
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